25 pages carry this tag.
India's IT services giants and software product companies share an industry label, but their economics are almost opposite. Services revenue grows with headcount. Product revenue grows with copies of the same code.
Return on equity is one number, but it is built from three. Until you split it apart, a high ROE and a fragile ROE look exactly the same.
Margin and return ratios explained: gross, EBITDA, EBIT and PAT margins, ROE, ROA, ROCE, ROIC and EVA, and how leverage can inflate ROE.
How DuPont analysis splits ROE into margin, asset turnover and leverage, in three- and five-factor forms, to show whether a high ROE can last.
Net profit margin is the profit left after every expense and tax, expressed as a percentage of sales. It is also called PAT margin, for profit after tax.
Return on equity measures the profit a company earns on its shareholders' money. Equity is money raised without paying interest: share capital plus retained reserves.
Return on capital employed measures operating profit earned on all the money running the business, equity and debt together.
Return on invested capital measures the after-tax operating profit a company earns on the capital tied up in its operations. Compared with WACC, it shows whether growth creates value or destroys it.
WACC is the average return a company must earn on its capital to satisfy both its lenders and its shareholders, weighted by how much of each it uses. It is the discount rate in a DCF of free cash flow to the firm.
Gross margin is what remains of each rupee of sales after paying for the raw materials and direct costs of making the product, before any operating expense.
Operating margin is the profit from running the business, before interest and tax, as a percentage of sales. It shows how efficiently the company converts revenue into profit from operations alone.
EBITDA margin is operating profit before depreciation and amortisation as a percentage of sales. It approximates the cash profit from operations before any capital spending.
Return on assets measures net profit against everything the company owns, regardless of whether it was funded by shareholders or lenders. It is ROE with the leverage removed.
The dividend payout ratio is the share of net profit a company distributes as dividends. What is not paid out is retained in reserves and grows the equity base.
The portion of a company's profit allocated to each outstanding share of common stock. A key indicator of company profitability on a per-share basis.
Return on equity: net profit as a percentage of shareholders' equity. It shows how much profit a company earns on the money its shareholders have put in and left in the business.
Indicates how efficiently a company uses its assets to generate profit. Shows how much profit is generated for every rupee of assets.
A measure of how efficiently a company uses its total capital (equity + debt) to generate profits. Better for comparing capital-intensive businesses.
The percentage of revenue that remains as profit after all expenses, taxes, and costs are deducted.
Operating profitability before interest, taxes, depreciation, and amortization as a percentage of revenue.
After-tax operating profit divided by the total capital invested in the business, both debt and equity. It measures how well the company converts all its capital into operating profit.
Operating profit (EBIT) with tax removed, before any financing effects. It is the profit the business generates for all capital providers.
The sensitivity of operating profit to changes in revenue, driven by the share of fixed costs. High fixed costs mean small revenue changes produce large profit swings.
Gross profit as a percentage of revenue: what remains after direct production costs, before operating expenses.
Operating profit (EBIT) as a percentage of revenue. It captures the profitability of the core business after all operating costs but before interest and tax.
Related topics: Valuation, DCF, Relative valuation, Cost of capital, Financial statements, Cash flow, Earnings quality, Red flags
